Ch 7&8

Question 1

The amount of safety stock that a firm carries depends upon

Answer 1

the predictability of inventory usage and the time period necessary to fill inventory orders.

Question 2

Variables important to credit scoring models include

Answer 2

All options are true:

1. age of company in years.
2. negative public records.
3. facility ownership.

Question 3

The economic order quantity

Answer 3

assumes that delivery times of each order are consistent.

Question 4

The corporate sweep account is an account

Answer 4

that allows companies to maintain zero balances in their checking accounts, with their excess cash moved into an interest-earning account and lets companies write checks on zero balance accounts with the understanding that when the check is presented for payment, money will be moved from the interest-bearing account to the appropriate payment account.

Question 5

Which of the following is the most liquid asset?

Answer 5

• Cash equivalents

Question 6

If XYZ Suppliers is at EQ and the cost of ordering is $40, the total inventory cost is twice the ordering cost.

Answer 6

• True
The carrying cost is the same as the cost of ordering at EOQ. So, mathematically, the Total inventory cost is twice the cost of ordering or twice the ordering cost if it is given, or the total cost of inventory utilizing the EOQ concept is the sum of the cost of ordering and the carrying cost.

Question 7

There are 7 regional collection centers?

Answer 7

False

Question 8

An accounts receivable policy should always conduct an analysis of a customer’s creditworthiness.

Answer 8

True

Question 9

As sales expand so will accounts receivable.

Answer 9

True

Question 10

ordered > EOQ —carrying cost increases & ordering cost decreases

Is the information true?

Answer 10

Yes, true

Question 11

Commercial bank term loans

Answer 11

are offered to superior credit applicants

Question 12

Friedman Roses Incorporated needs $65,000 in funds for expansion. With a compensating balance requirement of 20%, how much will the firm need to borrow?

Answer 12

$81,250
funds needed = loan amount / (1 - C%) = 65000 /(1- 2) = $81,250

Question 13

Compensating balances

Answer 13

are used by banks as a substitute for charging service fees.

Question 14

Hedging refers to

Answer 14

a transaction that reduces risk exposure.

Question 15

Firms exposed to the risk of interest rate changes may reduce that risk by

Answer 15

hedging in the financial futures market.

Question 16

2/10 Net 30 on $100 billing means we could pay $98 up to the 10th day or $100 at the end of 30 days

Answer 16

True

Question 17

You are quoted a 6% annualized interest rate on a $100,000 loan for 90 days (1.5% for the 90 days) with a 20% compensating balance. What amount of the loan will you be able to use?

Answer 17

$80K
Loan Amount - Compensating % Amount
100K - (2 * 100K) = $80K

Question 18

Commercial paper is a Short-term (less than 270 days) secured note sold to a lender or on the open market.

Answer 18

False
CP is a Short-term (less than 270 days) unsecured note sold to a lender or on the open market

Question 19

When a compensating balance is required the effective interest rate remains the same.

Answer 19

False

Question 20

Assume you need to walk out the door with $1 with a 20% compensating balance requirement this means you need to ask to borrow $1.20.

Answer 20

False
$1/(1-.2)=$1.25

Question 21

Spontaneous credit shrinks as sales expand and grow as sales decline

Answer 21

False

Question 22

Trade credit from suppliers is normally the most available form of short term-financing

Answer 22

True

Question 23

Bank loans are usually short term and should be paid off from funds from the normal operations of the firm

Answer 23

True

Question 24

Trade credit was the largest provider of short term financing

Answer 24

False

Question 25

Spontaneous credit grows with ___ and contracts during ____

Answer 25

Business (sales) expansion, declines

Question 26

Accounts payable are a

Answer 26

Spontaneous source of funds, growing as the business expands

Question 27

Banks prefer self liquidating loans

Answer 27

True

Question 28

Prime rate

Answer 28

The rate that a bank charges to the most creditworthy customers

Question 29

Prime rate premiums are added based on credit risk

Answer 29

True

Question 30

Rate can fall below published rates due to competition or economic conditions

Answer 30

True

Question 31

Significance of prime rate;

Answer 31

Benchmark for other interest rates Indicators of monetary policy Impacts consumer spending and business investment Influences corporate profits

Question 32

Nvm

Answer 32

Nvm

Question 33

What is meant by Net Credit Position?

Answer 33

A/R - A/P

Question 34

Rate for US dollar borrowing in London market

Answer 34

LIBOR

Question 35

Significant international Benchmark interest rate

Answer 35

LIBOR Was lower regulation in London market Scandal involving rate manipulation Replaced by SONIA

Question 36

Sterling Overnight index average SONIA

Answer 36

Replaced LIBOR

Question 37

What’s positive when AR are greater than AP and negative when the opposite is true?

Answer 37

Net credit trade

Question 38

Who tend to be net providers of trade credit (relatively high receivables)

Answer 38

Larger firms

Question 39

Who typically is in user position

Answer 39

Smaller firms (relatively high payables)

Question 40

Refers to minimum cash balances that a bank requires a borrower to maintain as part of a loan agreement

Answer 40

Compensating balances

Question 41

When interest rates are lower,

Answer 41

Compensating balance rises

Question 42

What should be the managers primary concern in managing cash and marketable securities

Answer 42

Liquidity and safety

Question 43

Which of the following is generally considered the least liquid of current assets

Answer 43

Inventory

Question 44

Characteristics of a money market deposit account include

Answer 44

All of the options are true. A lower risk than money market funds, insurance by federal agencies, generally a limit of three deposits or withdrawals per month.

Question 45

Generally, the safest and most marketable instrument for a short term investment is

Answer 45

Treasury bills

Question 46

The three primary policy variables to consider when extending credit include the following except

Answer 46

The level of inflation

Question 47

We expect that we can receive annual incremental income after taxes of $25,000 including an adjustment for uncollectible accounts. What is the maximum commitment to A/R that we should be willing to assume if our firms a minimum required after tax return is 8%?

Answer 47

$312,500

Question 48

Dun & Bradstreet is known for providing

Answer 48

Credit scoring reports that rank a companies payment habits relative to its peer group

Question 49

Waldron Inc. is considering selling to a group of new customers that will bring in credit sales of $24,000 with a return on sales of 5%. The only new investment will be in account receivable. Waldron has a turnover ratio of six to one between sales and accounts receivable what is Waldron Inc. expected return on investment?

Answer 49

30%

Question 50

Cost savings from Just in time inventory management include

Answer 50

All of the options are true Greater productivity, lower inventory financing costs, reduced overhead expenses

Question 51

Warren enterprises expects 30,000 unit sales, has ordering cost of $22 per order, carrying cost of $1.50 per unit and desires to keep 125 units in safety stock. Assuming level production what should its average inventory be?

Answer 51

594

Question 52

Use of the economic order quantity

Answer 52

Provides the lowest overall inventory costs

Question 53

Which of the following is the most liquid asset?

Answer 53

Cash equivalents

Question 54

What is generally the largest source of short term credit for small firms?

Answer 54

Trade credit

Question 55

A large manufacturing firm has been selling on a 310 net 30 basis. The firm changes its credit terms to 220 net 90. What change might be expected on the firms balance sheets?

Answer 55

Increased receivables

Question 56

If analog computers can borrow 8% annually for three years what is the effective interest rate on $1 million loan where a 15% compensating balance is required

Answer 56

9.41%

Question 57

Mr. Jones borrows $4500 for 90 days and pay $75 interest. What is his approximate effective rate of interest?

Answer 57

6.7%

Question 58

Von Hayek kayaks can borrow $12,500 for 60 days at a cost of $220 interest. What is the effective rate of interest?

Answer 58

10.6%

Question 59

LIBOR is

Answer 59

An interest rate paid on euro dollar loans in the London market

Question 60

Which of the following is not a characteristic of commercial paper?

Answer 60

It has a one to two year maturity

Question 61

Commercial paper that is sold without the use of an actual paper certificate is known as

Answer 61

Book entry paper

Question 62

Accounts receivable may be used as a source of financing by

Answer 62

All of the answers are correct factoring the receivables to a finance company pledging the receivables as collateral, selling securities back by the receivables

Question 63

Which method of controlling pledged inventory provides the greatest degree of security to the lender

Answer 63

Warehousing

Question 64

Which of the following is non-a method for controlling pledged inventory

Answer 64

All items are true floor planning, blanket, inventory liens, and public warehousing

Question 65

Hedging refers to

Answer 65

A transaction that reduces risk exposure

Question 66

The financial futures market

Answer 66

Allows for the delivery of financial instruments at a future point in time

Question 67

Two types of production

Answer 67

Seasonal, level

Question 68

Benefit of inventory management?

Answer 68

Saves money

Question 69

Which of the following is not a benefit of commercial paper to a corporation

Answer 69

It is less risky

Question 70

Which method of controlling pledge inventory provides the greatest degree of security to the lender

Answer 70

Warehousing